Trichet issues warning as Italy breaks fiscal rules

European Central Bank (ECB) president Jean-Claude Trichet struck a gloomy tone on euro-zone growth and warned against fiscal indiscipline yesterday, as revisions to Italy's 2003 and 2004 deficit figures put it in breach of European Union rules for the first time since 1999.

He said there was "no clear sign" of growth dynamics strengthening, while poor consumer confidence, persistently high oil prices and global economic imbalances posed downside risks.

Slow euro-zone growth is adding to difficulties faced by European governments in curbing fiscal deficits.

Revisions to Italian data by Eurostat, the European Commission's statistical agency, showed the country breaching the limit on budget deficits of 3 per cent of gross domestic product (GDP).

The changes will be used by Joaquin Almunia, EU Monetary Affairs Commissioner, to underpin a recommendation that action be taken against Italy under the EU's Stability and Growth Pact. Mr Almunia's spokeswoman expected the commission report on Italy's deficit to be presented to EU finance ministers in early July.

Since the commission predicts Italy will also breach the 3 per cent ceiling in 2005, the revised data for 2003 and 2004 will help Mr Almunia to argue the problem is persistent and action must be taken.

At the European parliament, Mr Trichet said fiscal deficits in many euro-zone countries "remain disappointing". Without additional measures, it was "increasingly unlikely" that deficits in excess of 3 per cent would fall back below the limit. Rather than stimulating growth, excessive deficits would foster a lack of confidence among consumers, he warned.

Mr Almunia has described the Italian case as "a test" of whether EU ministers are serious about imposing budget discipline under the stability pact, rewritten by European leaders in March.

The new figures for Italy put the deficit for 2003 and 2004 at 3.1 per cent of GDP, rather than the earlier 2.9 and 3 per cent reported by Rome.

Eurostat said it was checking other details of the Italian accounts and that "this could lead to a further upward revision in the government deficit between 2001 and 2004". - (Financial Times Service)